Taking a Closer Look at the Economics of Cloud Communications

When this series began several posts ago, I outlined two themes for analysis – the rationale for cloud communications and the economics. The first theme has been covered on a few levels since then, and it’s time to move on to cloud economics.

This is a big topic, and I’ll start by asking why economics should or could be a rationale for cloud communications. Of course cost control is a primary consideration for any business, but to do this right, proper context is needed. Any decision around cost has two basic aspects that define this context; absolute and relative. A tactical decision is based only on the former, whereas a strategic decision addresses both.

Absolute considerations for cost reduction

When considering cost in absolute terms, the driver is very simple – spend less. Sometimes businesses have a knee-jerk reaction when things aren’t going well, and this is one of the easiest levers to pull.

Cutting costs and/raising prices will fix most of what ails a business, but only in the short term. When changes have to be made in short order, these are the responses, and questions are only asked later if at all. Most businesses operate in reactive mode rather than being proactive, and don’t have the luxury of doing things that will have a more sustainable impact over time, such as investing in R&D, upgrading employee training, building closer ties with customers, etc.

Cloud communications becomes very relevant in such a scenario. Let’s start at the root – your phone system – and this will bring us to the cloud in due time. Legacy telephony is still the norm for many SMBs, and the limitations are becoming more apparent as we shift to other communications modes, namely wireless devices and our PCs. The phone system may still work well for its intended purpose, but usage is declining and the cost is high relative to other options.

In that context, telephony is an easy target for cost-cutting and that’s where VoIP usually enters the picture. This is very much a transaction-based move where you substitute a high cost service for a low cost service, and the objective is achieved, at least in absolute terms. VoIP typically delivers 20-30% savings, and the metrics can be tracked almost from the start, so this fits the bill nicely.

Relative considerations for cost reduction

While VoIP is an attractive short-term fix, the relative considerations are different and often not apparent until after the fact. When compared to legacy telephony, VoIP isn’t totally apples-to-apples, and there will be trade-offs on both sides of the ledger. Voice quality and service reliability are the main compromises, and the business has to think about how much concession to make here. VoIP continues to mature in its own way, but to get TDM-caliber performance, some network upgrades will likely be necessary. As such, the true cost starts to escalate.

If telephony was a pure commodity, there would be no need to consider both absolute and relative conditions. However, it is not, and VoIP will bring some added costs, as well as new benefits. The core calling features of TDM service will usually be matched, but you may get new features at no cost that you didn’t have before – either by choice or availability. Furthermore, being IP-based and running over a data network, VoIP can be integrated with other applications in ways that simply are not possible with legacy telephony. As such, the business is now poised to benefit in ways other than cost reduction, and surely that must count for something.

Summary

These are just some basic examples to show how VoIP involves more than just cutting telephony costs. While that objective can be reached in a tidy manner, new costs will arise to make it worthy of everyday use, and you will also gain new benefits that are not easily measured. In that regard, VoIP is clearly more than the sum of its parts. Of course, if you were tasked with replacing one VoIP service with a cheaper one, the decision process would be easier, but it’s more likely you’re coming from a legacy environment.

As such, when thinking about cost reduction as a driver for business decisions, you really need to consider both the relative and absolute components – unless you only care about saving money. That’s not a good way to run a business, though, and as you’ll see over the next few posts, a more strategic approach to cost reduction will deliver better outcomes all around.

I’m starting this analysis with VoIP because it’s pretty simple and is good starting point to outline these absolute/relative differences. Unified communications and the cloud are much more involved, and with this foundation in place, that’s where my next post will continue.

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